Chrysler has filed its Ch. 11 proceeding after much public exposure of the difficulties facing that company. The new guy in the white house has talked about all the sacrifices made by the unions and others to try and make things work out without the necessity of the filing and he has roundly condemned the “hedge funds” and/or other bankers for not agreeing to the deal profferred by Government, Inc. That deal is for the benefit of the UAW and it is plain as the nose on your face that tremendous pressure was brought to bear on the bondholders and the banks to agree to the terms “suggested” by the government. Did you realize that the union workers get paid overtime when they work more than only 6 hours? It is part of their contract quota rules for production. Don’t you wish you had such a sweetheart deal and that you could retire after 30 years on the job with full benefits. That is why they have workers who are retired at age 50! That is ridiculous and they wonder why they got into trouble and couldn ‘t compete with others.
The banks included several who had received the TARP money. The government is their creditor and the regulator of them. The Treasury, Comptroller of the Currency, the Federal Reserve and FDIC all have various hammers hanging over their heads. I wish I had been in on some of those conversations that took place in the last week or so between Government, Inc. and those banks. I will bet a dollar to a doughnut that the message was made very clear to them that they had better take the government offer or the consequences would be unpleasant. They were threatened pure and simple. Why would they give up their secured position when they could do better even in a straight liquidation unless they were coerced into doing so. The same goes for the hedge fund creditors who held secured bonds. I haven’t seen those instruments but I have spent a career working in this area and I know they also would do better in a liquidation than taking the enormous haircut Government, Inc. was imposing on them and extorting them to take. Those banks and hedge funds have a fiduciary duty to their shareholders. That is the highest duty imposed under the law on any person or entity. Those shareholders of the hedge funds would be thousands upon thousands of folks, not just fat cat Wall Street types. The so-called little people who invested in mutual fiunds or even the hedge funds directly have a right to expect them to act strictly in the best interest of them and for them. The hedge funds are not there to do the political bidding of Government, Inc. and shore up the UAW. The banks caved in because of the regulatory pressure applied or threatened against them. I do not accept any other explanation because it would not comport with human nature or the normal affairs of man. Their shareholders should care. The hedge funds couldn’t be directly threatened and they held firm in their fiduciary duty to their shareholders.
Even a “liquidation” of Chrysler would result in a new company continuing to run a very slimmed down operation. It would make money and would be able to satisfy both the bank claims and the hedge funds and/or bondholders. It would be the UAW would have to take the haircut. There is a strict priority of payment in the Bankruptcy proceeding. There is a pecking order for payment of creditors in bankrupcy proceedings and those banks and bondholders would be up ahead of the suppliers and union claims. There is the “absolute priority rule” in a Ch. 11 case which essentially means that no class of claims can receive any benefit until the higher classes have been paid in full or that higher class has agreed to different terms than payment in full. That is a simplification but it has the heart of the matter. Government, Inc. has used muscle and obviously will continue to do so to force secured creditors (the regulated and controlled banks) to ignore their rights under that rule. Governement, Inc. rather than defending the rule of law is the outlaw in this proceeding. The pressures and extortions which amount to official oppression are in violation of our laws.
Title 18, section 152 of the US is a portion of the penal provisions relating to bankruptcy. That section reads in part as follows: “A person who–(6) knowingly and fraudulently gives, offers, receives, or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof for acting or forbearing to act in any case under Title 11….shall be fined under this title, imprisoned not more than 5 years or both.” There are more provisions under Title 18 dealing with bankruptcy and some would bear upoon this situation. The banks were being compelled to forebear their rights in this case.
I would love to have some of those banks, hedge funds and government officials under oath about the negotiations of the last few weeks. The Government, Inc. boys did try to coerce those hedge funds and banks to abandon their fiduciary duty to their shareholders with threats, real or implied, to act and do as the government instructed them in the future Ch. 11 proceeding.
I have no problem with negotiations. They are good. It is always best to try to resolve legal problems and business disputes outside of any court. That process is not the problem. It is the use and abuse of official agencies of government that is the problem. It is ignoring the rule of law that is the problem. You know as well as I do that the government agents in these conversations made their suggestions dripping with the threat of adverse consequences for failure to adhere to government wishes. No different than Don Corleone making a “suggestion” to you. If the banks continue to cave to Government, Inc. they will have much to answer for to their shareholders. Who does management represent? There is only one answer to that question and they only have one loyalty and fiduciary duty–to their shareholders. The banks probably will cave in and avoid the absolute priority rule dilemma under bankruptcy law but they will have to explain that to their shareholders. The bondholders by law are entitled to be ahead of the unsecured suppliers and all those union claims. Why should they abandon that position? I hope they hang tough. Someone needs to fight for our laws and the equitable application of the laws. Thuggery is thuggery even if committed by an agent of the government.
The government proposal is for the UAW trust to get 55% and Fiat 35% and the US to have about 10% of the new company. Those bondholders are secured by the assets and are asked to take about a 70% loss when they could recover in full under the law. Those laws were in place when the deal was made and Chrysler wanted their money to operate. That was the bargain. It is your government arbitrarily destroying the right of the bondholders to the “benefit of the bargain” which is a cornerstone of all contract law.
The people with the masks amuse me. That swine flu virus is miniscule. I don’t know the exact size but it would be small enough to go right through any mask. All the mask is good for is for those already sick when they cough. It would contain some of the moisture from the cough. But if the virus is floating around that mask won’t stop it. Keeping your hands clean is a much more productive prophylactic measure.
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